iPod shows there's a piece of pie for all

By Clancy Yeates

20 December 2008 — 8:49pm

The winner of this year's Man Booker Prize dabbles in something most great works of fiction wisely steer clear of - economic commentary. In The White Tiger by Aravind Adiga, the eccentric lead character is a New Delhi driver-cum-entrepreneur named Balram Halwai, who uses the analogy of stomachs to explain the cutthroat world of business competition.

While India's caste system previously determined one's fortune, Halwai explains that the wonders of capitalism have levelled the playing field to one where aggression is the key to getting ahead. "These days, there are just two castes: Men with Big Bellies and Men with Small Bellies," he says. "And only two destinies: eat - or get eaten up."

As any economist worth his or her salt would agree, however, it's rarely this simple. And without ruining the story, Halwai's tale of moving up from poverty into the business elite is as disturbing as it is entertaining. It shows just how dangerous this type of black-and-white thinking can be. But besides adding much-needed colour to a notoriously dry subject, Halwai's belly analogy is also a common way of thinking about whole economies, as well as businesses.

How many times have you heard claims that if we don't lift our competitiveness, we'll be consumed by overseas rivals? This very question was hotly debated before the global financial crisis took over, and it centred on innovation moving abroad. As India and China moved from producing T-shirts and shoes to far more complicated things, like televisions, some top US firms also started moving cutting edge research and development to the emerging world.

In response, swathes of United States commentators and politicians feared that US technological prowess - widely seen as the jewel in corporate America's crown - was in grave danger. Outsourcing call centre jobs was one thing, critics shrieked, but this was quite another.

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In other words, they began questioning whether the bellies in these developing countries were getting too large and leaving the US with a smaller share of the pie. "It is a slippery slope," a management consultant for Boston Consulting Group told BusinessWeek in 2005.

The broader fear was that outsourcing innovation posed a grave threat to national competitiveness - often presented as the holy grail of economic policy.

This subject has tended to fly under the radar in Australia, where pre-credit-crunch business pages were more occupied with China's thirst for our resources. However, in the US it has tapped into deep fears, even prompting impassioned cries for the nation to catch up by compelling students to spend more time in science classes.

Though the global financial crisis has pushed these questions to the edge of public discussion, the Federal Government is preparing a white paper on innovation that it hopes to publish early next year. And by last month committing $6.2 billion to the ailing car industry - with much of this money directed to encouraging innovation - it signalled a will to spend up big to keep high-tech jobs in Australia.

But is innovation in emerging economies as threatening as the cries of alarm would have us believe?

As a disappointing science student, I'm biased against anything that could make pupils spend extra time in laboratories. But now a US scholar, Amar Bhide, has put forward compelling economic arguments against this alarmist view on emerging economies' innovation.

In The Venturesome Economy: How Innovation Sustains Prosperity In A More Connected World, published this year by Princeton University, Professor Bhide says the "techno-nationalists" are fighting the wrong battle. He's not arguing for spending on universities to be gutted, as no one disputes research and development is critical for creating economic wealth over time. But Bhide says it's too simplistic to see the benefits of a new idea going only to the country where it takes place.

Instead, globalisation means the benefits of a good idea can be spread throughout all the links in the chain of production. And it's not always the inventor who benefits.

His example is the iPod. Although it's been tremendously profitable for Apple - they've sold more than 150 million of them - it was invented elsewhere. In fact, Singapore's Creative Technology came up with a similar product nearly two years before the iPod was launched in 2001, and later received $US100 million from Apple for a patent infringement.

Instead, Apple's contribution was to create a novel fashion item, which led to spectacular sales, especially among the world's most rampant consumers in the US. iPods are assembled in China with parts from elsewhere in Asia, but Bhide says the value added through marketing, selling and distributing iPods in the US is roughly the same as its production value.

In short, the iPod shows the US isn't locked into a "winner takes all race for scientific and technological leadership" because it's an instance where innovation on foreign territory has also helped the US economy.

Too often pundits - in particular, business people - say competitiveness should be the country's top goal. But even when looking at things in purely material terms, this is a wee bit simplistic. The iPod story shows that the US and countries in Asia have gained from the idea that originated in Singapore and represented extra competition to US businesses. In Australia, our economy also reaps the rewards of higher productivity in Asia, because it's the key market for our exports.

Globalisation - according to its supporters at least - was meant to be more than a one-way street where established players exploited the lower costs of the third world. And by developing more advanced industries the emerging economies have an opportunity to climb the ladder.

Indeed last month's Harvard Business Review scoured the globe for the world's next biggest companies, and they weren't the usual suspects. Examining obscure-sounding companies such as Chinese telecom equipment-maker Huawei and Pearl River Pianos, it said many emerging world players were increasingly taking on established multinationals and often beating them at their own game.

To return to the stomach analogy, the developing world's appetite for more advanced production doesn't mean prosperity in wealthy countries is about to be gobbled up.